One of the most difficult administrative tasks for retailers, manufacturers and contractors is keeping tabs on inventory. If the numbers don’t seem to add up during your physical inventory count, it may be time to bring in a fraud expert to uncover the source of the discrepancy.

Stolen or misplaced

Before assuming theft, a fraud expert will determine whether the items were really stolen or simply misplaced. In many cases, employees keep sloppy records or fail to follow proper procedures, resulting in “missing” inventory.

If there’s no innocent explanation for missing inventory, the expert looks for signs that the environment is conducive to fraud. For example, a company with poor controls over purchasing, receiving and cash disbursement is at high risk of inventory theft.

When experts believe inventory could have been stolen, they comb records for clues. Anything that doesn’t follow established inventory procedures could be suspicious — such as odd journal entries posted to inventory or large gross margin decreases.

Paper trail

Next, the expert works to prove the fraud. Perpetrators may leave a paper (or electronic) trail, so experts typically review journal entries for unusual patterns. An entry recording a physical count adjustment made during a period when no count was taken obviously warrants investigation. The expert follows up by tracing unusual entries to supporting documents.

Vendor lists also may show suspicious patterns, such as post office box addresses substituting for street addresses. Even if they’ve found no evidence, fraud experts look at vendor invoices and purchase orders for anomalies such as unusually large invoices.

Discrepancies between the amounts due per invoice, the purchase order and the amount actually paid warrant investigation. Finally, experts familiarize themselves with the cost, timing and purpose of routine purchases and flag any that deviate from the norm.

Physical evidence

It’s obviously important to confirm physical inventory as well. Although a count performed by employees may disrupt normal business routines, it’s a good way to learn exactly what merchandise may be missing — and could lead directly to the thief. Fraud experts observe warehouse activity once employees realize a count is imminent because thieves may attempt to shift inventory from another location to substitute for missing items.

Inventory at remote locations also can disappear. So fraud experts often will confirm quantities with the storage facility.

Limit the damage

Stolen inventory can damage your company’s bottom line and reputation. Contact one of our Certified Public Accountants for help finding your missing goods — and the thief.